Brazil Raw-Sugar Discount Spurs White Output as Refiners Profit

Feb. 7 (Bloomberg) -- Record global sugar inventories are
forcing Brazilian exporters to offer discounts on raw-sweetener
supplies, helping to bolster profit margins for processors as
they increase output of the refined commodity.

Raw sugar from Brazil, the world’s largest producer, has
been selling at a discount to New York futures since October,
after trading at a premium, according to Green Pool Commodity
Specialists. Brazil’s harvest ended in December. The discount is
adding incentives to refine more white sugar, which already
fetched an average annual premium above $100 a metric ton in the
past four years, up at least 30 percent from the mean of the
previous two decades.

“Refiners continue to be profitable in most markets,
especially now that they can buy raw sugar at a discount in the
physical market and sell whites at a premium,” said Leonardo
Bichara Rocha, a senior economist at the International Sugar
Organization in London. “Domestic white-sugar prices in some
markets in Africa and the Middle East are still significantly
higher than the world white-sugar market price.”

Increased refinery output is expanding a surplus and
eroding prices. Global sugar inventories will rise to 43.4
million tons in the 12 months ending Sept. 30, the biggest since
at least 1960, the U.S. Department of Agriculture estimates. The
International Sugar Organization forecast refined supplies
available for exports will exceed demand from importing nations
by 2 million tons. Refined, or white, sugar fell on Jan. 28 to
$399.10 a ton on NYSE Liffe in London, the lowest for a most-active contract since April 2009. It closed yesterday at $437.80
a ton.

Brazil Discount

After a record harvest last year, Brazil is offering
discounts during a period when available supplies of raw sugar
should be declining. The country is selling the commodity at a
discount of 0.45 cent to 0.5 cent a pound ($9.92-$11 a ton),
according to Brisbane, Australia-based researcher Green Pool.

While white-sugar futures in London are down 43 percent in
the past three years, that’s less than the 51 percent plunge in
raw sugar traded on ICE Futures U.S. in New York, adding an
incentive to refine more even as global supplies of all
varieties tracked by the ISO outpace demand for a fourth
straight year.

Overseas sales of refined sweetener by Thailand, the
second-biggest exporter, may rise by as much as 18 percent,
according to Mitr Phol Sugar Corp., the country’s top cane
processor. Millers that usually have the capacity to turn raw
sugar into white in a process known as re-melt will probably
ship as much as 3.5 million tons of white sugar in 2013-14, said
Kannika Vongkusolkit, a marketing strategist at Mitr Phol. That
compares with 2.97 million tons a year earlier.

Latin America

Mexican exports will gain 19 percent to a record 2.5
million tons, while overseas sales by countries in Central
America rise to 870,000 tons, the third-highest ever, the USDA
said. Guatemala may have supplies available to delivery on NYSE
Liffe when the March futures contract expires on Feb. 13, said
Fabienne Pointier, an analyst at Kingsman SA, the Lausanne,
Switzerland-based unit of McGraw Hill Financial Inc. that is
holding its annual sugar conference in Dubai starting tomorrow.

“We had an artificially high white premium last year, and
that sent the wrong signal to refiners and origin producers such
as Thailand and Guatemala,” said Bas van Goor, the head of
white-sugar trading at RCMA Commodities Asia. “The whole market
is now paying the price. Supplies are more than sufficient, and
with the market now paying you to store and carry the sugar, the
odds are that we will see a bit of a depressing market in the
next five to six months.”

London Contract

The London futures contract, created in 1983, also may no
longer be representative of the market for refined sugar, van
Goor said. The contract was designed to facilitate deliveries of
bagged sugar stacked on break-bulk vessels, rather than inside
containers on ships. About 70 percent of the white-sugar trade
is in containers, up from 30 percent a decade ago, he said.

“The London contract represents break-bulk vessels, and
the number of customers that wants them has shrunk,” said van
Goor, a former head of sugar at Cargill Inc. “The market is
getting easier and easier to squeeze, and by doing so, you
artificially keep the white premium high, sending the wrong
signal to producers.”

NYSE Liffe is considering changes to the contract to make
delivery in containers acceptable after the bourse was bought by
IntercontinentalExchange Group Inc., according to two people
familiar with the discussions who asked not to be named because
the information isn’t public. Just 19 of the world’s countries
account for 95 percent of all buyers of white sugar in break-bulk, according to RCMA data. Adaora Anunoby, an NYSE Liffe
spokeswoman, declined to comment.

‘Catch Up’

The Liffe contract is “out of date, and it needs to catch
up with what the real world is doing,” said Paul Baksh, the
head of sugar and ethanol at brokerage ICAP Energy Suisse SA in
Geneva. “The real world has to take it in containers or at
least have the container option. At the moment, it’s geared to a
handful of giant people or corporations.”

The countries that can take break-bulk vessels will have
sugar in warehouses for the next five to six months, said RCMA’s
van Goor. That’s helping put pressure on prices because most of
the importers that had been buying have sufficient inventory,
the ISO’s Bichara Rocha said.

While the premium of the London contract over raw futures
has declined this year to average $81, compared with $102.50 for
2013, that still may be high enough to encourage refiners.
Thailand probably will re-melt raw sugar even if the white
premium falls below $70, Kingsman’s Pointier said. Thai white
sugar output rose 36 percent to 1.2 million tons from Nov. 15 to
Jan. 27, according to the office of the cane and sugar board.

‘Better Returns’

“Production of white and refined sugar in Thailand may
increase this year because of attractive prices,” said Piromsak
Sasunee, chief executive officer of Bangkok-based Thai Sugar
Trading Corp., the country’s biggest exporter. “Although it is
quite difficult to sell white sugar, it gives better returns at
this time, when the price of raw sugar slumps.”

Installed capacity to process raw sweetener has been rising
since 2000, with about 6.5 million tons added in the Middle East
and North Africa, 5.3 million tons in the Indian sub-continent,
5.1 million tons in the Far East and 2.7 million tons in sub-Saharan Africa, according to an ISO study. Al Khaleej, based in
Dubai, is the world’s biggest refinery.

The white-sugar price in London rallied 8.2 percent since
Jan. 22 as the driest January on record threatened to cut
production from the next crop in Brazil. The contract for March
delivery is still cheaper than futures in later months. That
allows refiners to lock in profit because it takes two to three
months from the time they buy raw sugar before the refined
sweetener is delivered to customers, said Tom McNeill, a
director at Green Pool.

“We need to see a much lower premium to convince the
white-sugar producer to slow output,” Kingsman’s Pointier said.
“Even with a lower white premium, it may be already too late.
White-sugar producers may already have received incentives
earlier on to produce for the next six months. They’ve sold most
of what they will make.”